Understanding and Calculating Flotation Costs

Updated Nov 26, 2018

A flotation cost is incurred when a company issues new securities.Flotation costs can be underwriting, legal and registration fees, or printing expenses and other costs. They depend on their associated securities’ sizes, types and risks.
Companies must consider how flotation costs impact the capital they can raise with a new issue.
Suppose Joe’s Corporation issues new stock shares for $50 each. If its flotation costs are 5 percent, it will raise $47.50 for each new share it sells.
Joe can find how many shares his corporation needs to sell to raise $100,000 with some simple calculations. He starts by dividing the desired amount by 1 minus 5 percent, or 100,000 divided by .95, which is about 105,263. This amount is then divided by the $47.50 raised with each new share, after which Joe knows his corporation has to sell about 2,216 shares.
Flotation costs, expected return on equity, dividend payments and expected retained earnings are all part of a company’s new equity cost calculations.